Is Social Security Becoming a Bad Deal for American Workers?

social securitySocial Security is one of the most contentious government programs ever created. Although millions of past and current retirees have relied on it for a big part of their income, others have criticized the program as a Ponzi scheme that's doomed to eventual failure.

Recently, Social Security reached a milestone that's sure to add fuel to the highly charged policy debate. For an increasing number of new retirees, the amount that Social Security will pay out in benefits will end up being less than the payroll taxes they paid into the program over the course of their careers.

social securityMoving Down the Scale

For some retirees, this is nothing new. High-income earners have been in this negative-return situation for quite a while.

According to analysis from the Associated Press, though, many middle-income retirees now face the same situation. Moreover, even if nothing happens to reduce benefit levels going forward, the trend is likely to continue and affect more retirees with even lower incomes.

The Push and Pull of Social Security

A few factors go a long way toward explaining exactly why this shift is happening. On one hand, with the exception of the past few years, the amount of payroll taxes that workers pay has steadily risen. During the initial years of the program, from 1937 to 1949, the portion of payroll taxes earmarked for Social Security was locked at 1%. That amount steadily rose during the ensuing decades, hitting 2% in 1954, 3% in 1960, 4% in 1969, and 5% in 1978. The current rate of 6.2% held steady since 1990, although the temporary payroll-tax cut reduced that rate by 2 percentage points. So today's retirees have had more of their earnings subject to high rates than those in earlier generations.

In addition, the amount of wages on which the government collects payroll taxes has marched inexorably upward. As recently as 1972, Social Security taxes applied only to the first $9,000 in annual wages that a worker earned. This year, that figure has climbed above the $110,000 mark.

Social securityOn the other side of the equation, the formula that determines monthly payments from Social Security doesn't match up in a straight line with average career earnings. Instead, Social Security has what it calls "bend points" above which every additional dollar of earnings yields a smaller increase in your monthly benefit. For instance, in 2012, the first $767 of average monthly earnings produces a benefit of $0.90 per dollar, while additional earnings up to $4,624 boosts monthly payments by $0.32 and income above that increases a payment by $0.15.

The bend points in the benefits formula explain why higher-income retirees fell below the breakeven point earlier than middle-income retirees. Because taxes rise at a constant rate but benefits provide diminishing returns as income levels go up, the redistributive effects of the program hit those with higher incomes first.

It's important to remember that Social Security covers a lot more than just retirees directly. With spousal benefits, as well as payments to a surviving spouse and minor children after your death, many payments from Social Security go to other people. Moreover, with disability insurance coverage, you may get benefits long before reaching retirement age if something happens to you.

Worse to Come?

Perhaps the scariest part of this analysis is its assumption that benefits will continue at their current levels. In the latest report from Social Security's trustees, projections indicated that, left unchecked, benefits would have to drop by about a quarter in the year 2033 because of shortfalls between the amount of payroll taxes collected and benefits owed to retirees.

In this election year, most politicians have been afraid to tackle Social Security head-on. But with increasing pressure to justify the benefits of the program, you may see reform efforts appear once the election is over -- especially if more members of the public start seeing the program as a bad deal.

For more on retirement: Motley Fool contributor Dan Caplinger isn't taking Social Security for granted. You can follow him on Twitter @DanCaplinger.

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This article does not make any sense because it incorrectly looks at Social Security as if it were an investment program while it is actually an insurance program. Just like car or health insurance, its goal is not to provide a "return" linked to investment or premiums paid, but to provide financial security if a specific event occurs. Here, that specific event that is insured is longevity. Social Security makes sure that anyone who stays alive after a certain age can count on a minimum income to live a decent independent life until death without having to rely on their children or beg in the streets. Those who die early receive less, those who die later receive more, but no one knows in advance when this will happen. There is a looming crisis with Medicare, but not with Social Security because here the aggregate numbers are highly predictable. Slightly increasing the maximum income subject to taxation will allow the system to continue providing needed security in old age.

September 14 2012 at 2:42 PM Report abuse rate up rate down Reply

Another socialist Ponzi scheme where they take our cash and give us a fraction of it back...thieves!

September 12 2012 at 12:19 AM Report abuse rate up rate down Reply

Everyone knows this social program is another big Ponzie scheme. We work, uncle Obama raids the social security funds for his pals and we get a pittance back. Not sure how daddy Washington gets away with this theft. If we kept the $ the socialist steal from our check we could invest it and retire with tenfold compared to the little bit we get back after the fed raids the SS fund.

September 12 2012 at 12:18 AM Report abuse rate up rate down Reply
1 reply to mary1160's comment

It is not a Ponzi scheme,it is a TAX on the MIDDLECLASS,You were suppose to die before ever recieving benefits. In 1937 the average man died at60 and women at 62,so you collect at 65. Now it is called an ENTITLEMENT,but really just a tax. One of the main reasons times were good in the 1950 s was because the fund could be raided freely when ever somthing had to be paid for. If people would just die when they turn 60 everything would be fine

September 30 2012 at 11:19 PM Report abuse +1 rate up rate down Reply

How much does private disability insurance cost?
How much would the survivor benefit cost privately with a possibility of covering adult children to age 22?
Factor in this cost to get a better idea of deal or no deal.

September 11 2012 at 1:51 PM Report abuse +1 rate up rate down Reply

How much does private disability insurance cost?
How much would the survivor benefit cost privately with a possibility of covering adult children to age 22?
Factor in this cost to get a better idea of deal or no deal.

September 11 2012 at 1:51 PM Report abuse +1 rate up rate down Reply

Try working and paying the maximum amount for over 40 quarters and still be working but not yet old enough to get SSN because your only 58. Tthen die and it all goes to never/never land. As me if I am in favor of privatization!

September 11 2012 at 11:53 AM Report abuse -1 rate up rate down Reply

Social Security Cards up until the 1980s expressly stated the number and
card were not to be used for identification purposes. Since nearly everyone in the
United States now has a number, it became convenient to use it anyway and the
message, NOT FOR IDENTIFICATION, was removed.

Franklin Roosevelt introduced the Social Security (FICA) Program. He promised:

1.) That participation in the Program would be Completely voluntary,
No longer Voluntary

2.) That the participants would only have to pay 1% of the first $1,400 of their annual Incomes into the Program,
Now 7.65% on the first $90,000

3.) That the money the participants elected to put into the Program would be deductible from their income for tax purposes each year,
No longer tax deductible

4.) That the money the participants put into the independent 'Trust Fund' rather than into the general operating fund, and therefore, would only be used to fund the Social Security Retirement Program, and no other Government program.
Under Johnson the money was moved to The General Fund and Spent

5.) That the annuity payments to the retirees would never be taxed as income.
Under Clinton, up to 85% of your Social Security can be Taxed

Since many of us have paid into FICA for years and are now receiving a Social Security check every month --
and then finding that we are getting taxed on 85% of the money we paid to the Federal government to 'put
away' -- you may be interested in the following:

Q: Which Political Party took Social Security from the independent 'Trust Fund' and put it into the general fund so that Congress could spend it?
A: It was Lyndon Johnson and the democratically controlled House and Senate.

Q: Which Political Party eliminated the income tax deduction for Social Security (FICA) withholding?
A: The Democratic Party.

Q: Which Political Party started taxing Social Security annuities?
A: The Democratic Party, with Al Gore casting the tie-breaking' deciding vote as President of the
Senate, while he was Vice President.

Q: Which Political Party decided to start giving annuity payments to immigrants?
A: Jimmy Carter and the Democratic Party. Immigrants moved into this country, and at age 65, began to receive Social Security payments! The Democratic Party gave these payments to them, even though they never paid a dime into it!

Then, after violating the original contract (FICA), the Democrats turn around and tell you that the Republicans want to take your Social Security.

September 11 2012 at 11:49 AM Report abuse +3 rate up rate down Reply
2 replies to wewoff's comment

Good summary, but on #2 you mixed the Medicare rate in and left out the employer side, which believe me as an employer, is really paid by the employee. The only good thing about the employer "paying half" is that the employee does not pay federal income tax on the employer's part of the tax payment. The employee does pay income tax on the employee's part of the tax payment.

Also the total maximum amount taxed is now $110,100

With the temporary tax break for employees, in 2012, the employee pays 4.2% and the employer pays 6.2% on up to $110,100. On January 1, 2013 that will revert to 6.2% for each.

September 11 2012 at 12:20 PM Report abuse +1 rate up rate down Reply

Good job for laying the facts out. Just to reiterate what you indicated at the end is to ask a question. Why won't the Dems. come up with a plan to shore up Social Security and not lie about it being okay like Obama does? We all know the answer to that. Because the libs want elected again by the sheep who believe their every word. After the election they will tell them now we have to change it but it will be okay. Now we have to lower your payments even though you paid into it all your life but it will be okay. Just really tired of listening to all the liberal lies while our country is going bnakrupt!

September 11 2012 at 12:50 PM Report abuse -1 rate up rate down Reply

Social Security would be better if they got all the people on drugs off of it, the drunks, the people who can work and won't. And tell the Gov no more raiding Social Security for their programs.

September 11 2012 at 6:26 AM Report abuse rate up rate down Reply

Why do you think there is a difference between "the government's money" and "social security's money"? Because you have been fooled into believing it.

The only way a government bond can be redeemed is by the government selling assets, collecting taxes and fees, or borrowing elsewhere by issuing another bond. All government bonds are effectively a promise to tax in the future. A government bond that the government itself holds is a promise to pay itself in the future, but with what?

You can have your very own social security "trust fund". Just write yourself a check from your checking account for $5 million and date it for the day you turn 65. That's just like the government bonds in the "trust fund". You can even write another check each year for the “interest” that you are paying yourself in your "fund".

Don't believe me? Then look at page 7 of this 12-page report of the US Treasury: "CITIZEN’S GUIDE TO THE 2011 FINANCIAL REPORT OF THE UNITED STATES GOVERNMENT":

"In addition to debt held by the public, the Government reports about $4.7 trillion of intragovernmental debt outstanding, which arises when one part of the Government borrows from another. It represents debt held by Government funds, including the Social Security and Medicare trust funds. Because these amounts are both liabilities of the Treasury and assets of the Government trust funds, they are eliminated in the consolidation process for the Government wide financial statements."

Just like your $5 million retirement check, the "trust funds" are an asset and a liability to the government, i.e. a wash. The American people would be no worse off and no better off financially if the "trust funds" were simply erased. Just like you would be no better or worse off if you tore up that check.

But the American people would be a little less fooled if the "trust funds" were eliminated, just like you would show you realize that you had better find another retirement plan, if you tore up that $5 million check and stopped fooling yourself.

September 11 2012 at 6:04 AM Report abuse rate up rate down Reply

Social security would be just fine if our government could keep their ******* hands out of it!

September 11 2012 at 5:59 AM Report abuse rate up rate down Reply